Tax Experts react to 23rd GST Council meeting announcements of November 10

The 23rd meeting of the GST Council in Guwahati will go down as a benchmark in the evolution of GST in India. Although, the most “headline-friendly” change is no doubt the reduction in rates of 178 items from 28% to 18% and other rates being reduced to the 12%, 5% and NIL categories, the real story lies elsewhere. The real change is the paradigm shift away from the flawed “equivalence” principle of fixing GST rates (i.e. the GST rate should be roughly equal to the earlier rate of excise plus VAT), to looking at goods directly, and categorizing them as “standard” (most mass consumption items fall here and in the range of 12% or 18%), “demerit” goods (i.e. sin or luxury items and fall in the 28% band or higher with the cess), and “merit” goods (items used by the poor, and fall in the zero or 5% band). Based on the thousands of representations made by companies and industry bodies, the Council seems to have accepted the principle of asking “what is the ideal band that this good should fall under”. This is a great move forward, and although a few items (like cement, and many consumer durables) which should really fall in the standard category are still in the demerit category, there is hope that these would be looked at eventually.

This also is the strongest indicator that the process of convergence of the standard rate somewhere in between 12% and 18%, will inexorably, albeit slowly, happen. As the tax revenues stabilize, which it has if you look at the tax collection data for the last three months, the Council will be further emboldened to look at other issues that need addressing, including the inclusion of real estate and fuel under GST.  

The relaxation of GST Returns will give a welcome breather to the GST Network to address the issues and flaws that have plagued the initial few months. Away from the spotlight, the GST Network can learn from the experience of the last few months and work to improve the system and processes to enable GST in the new avatar next financial year is more stable, interactive and productive.

The smooth functioning of the Council, despite cantankerous and hard-fought state elections going on simultaneously, bodes well for the country as the political class seems to have successfully dissociated tax policy from politics.

The GST rate changes announced yesterday will further facilitate in streamlining the rates, reducing complexity and increasing compliance. These reduction in rates will help in reducing prices of the products and increasing consumption. Further, the increase in threshold of composition to 1.5 cr is a significant move and may help in easier compliance. Also, the deferment of filing of GSTR-2 & 3 relating to this financial year and extension of due dates for various filings like Form Tran-01, GSTR-4 and 6, ITC-04, etc, have come as a breather to the businesses.

The correction in rates for most items in the highest tax slab comes as a relief but not as a surprise.

The way the GST Council had gone about clubbing different items in those rate slabs which fell on either side of a revenue neutral rate was anything but scientific. The Centre and States chose to obtain neutrality of tax incidence by simply estimating the current tax incidence on commodities and putting them in the nearest slab rate. This was conservatism at its best! Revenue neutrality ought to have been achieved by considering the expansion in base, economic conditions and expected revenue buoyancy. More importantly, the new tax system required a broad base and moderate rates to gain acceptability.

The rate of 18% was arrived as the standard rate which is a median rate where all goods and services whose tax policy is not explicitly specified would fall. Keeping a large part of goods outside of the standard rate was neither desired nor workable and was bound to lead to inflationary pressure. Therefore now the decision to keep only luxury, demerit and sin goods at the highest rate is the right decision, both optically and politically. The changes are nothing but a course correction.

The lowering of tax rates on a number of items will require those suppliers who are greeted with reduced rates to pass on the benefit by way of commensurate reductions of prices. Whether that happens or not would be yet another acid test that this ambitious reform would undergo.

The Government has reacted positively once again for the demands from MSME sector. The changes made in relation to composition levy, tax on hoteliers and relaxation in return filing are welcome. The uniqueness of Indian GST is all about matching of invoices. This should have been introduced in a phased manner after conducting field trials with the GSTN. Now going back or relaxing the norms will certainly result in irregular availment of input credit by fly by night operators in the absence of credit matching and eWay bill procedures. To curb such practices, if enforcement machinery is put in action, will lead to unwanted litigation piling up in courts as the GST law itself is settling down slowly as the experts themselves are confusing the trade with multiple views. In such a scenario, the authorities should come out with modified formats for return filing without diluting the design of GST. One option can be to prescribe invoice generation on GSTN portal, which should give uniform design for the invoice with appropriate HSN and tax rate when assessee types his product description with place of supply and destination of supply. This can significantly reduce the burden of matching of invoices and will cater to the uniqueness of Indian GST.

& Shivendra Dwivedi

The biggest relief to the taxpayers reeling under the technical glitches of the GST portal is the temporary suspension of filing of GSTR-2 and GSTR-3 until 31 March 2018. Continuation of GSTR-3B and GSTR-1 until such time will both safeguard revenue on the one hand and ease the compliance burden on the other. We can hope that the review of return forms by the Committee of Officers will lead to a redesign of the compliance mechanism which will provide long term relief.

Lowering rates from 28% to 18% of 178 items will undoubtedly come as a consumption boost giving a fillip to the economy. Allowing manual filing of Advance Ruling applications would help in resolution of disputed questions. By extending the benefit of Input tax credit to services provided to Nepal and Bhutan, the GST council has brought such services at par with exports. A flat GST rate of 5% on restaurants without benefit of Input tax credit has been proposed. This is mainly due to the concern of the government that benefit from increased input tax credit was not being passed on to the consumers.

Overall, yesterday's decisions will bring a huge cheer amongst taxpayers, consumers and tax professionals..!!

The 23rd GST Council meet concluded with a whole raft of positive measures like reduction in rates of various common use products as well as most which were typically not luxury or sin goods, liberalised penalties for delay in filing of returns, 5% rate without ITC for restaurants (except restaurants in hotels with room tariff of 7500 or above); proposed increase in turnover qualification for composition scheme to 1.5 cr, deferment of filing of GSTR-2 & 3 relating to this financial year, extension of due dates for various filings like Form Tran-01, GSTR-4 and 6, ITC-04, etc

While there were expectations of massive rate cuts, nobody anticipated a colossal overhaul in the rate structure. Keeping in line with recommendations from the fitment committee, the GST Council decided to reduce the rates of 177 supplies from the peak rate of 28 percent to 18 percent.

While Structurally nothing much has changed and various critical legal issues etc have not been addressed and the rate cuts are likely to result in lesser tax collections and a significant loss to government exchequers, it is hoped that the short-term revenue losses can be recovered by way of expanding the tax base and improving long-term tax compliance. This move provides respite to consumers and businesses alike and may prove to be a much-needed boost to the economy, which has sagged on account of a slowdown in growth and a harrowing transition phase to the new tax regime.

As expected, the 28% slab for goods have been pruned down significantly by the GST Council. While this is an welcome move, one wonders as to why a core item like cement continues to remain at 28% whereas relatively luxurious construction materials like slabs/tiles of marble and granite have been reduced to a GST rate of 18%. Cement was often procured at a concessional rate of 2% CST (through Form ‘C’) in the pre-GST era and thus reduction of rate of cement to 18% would not have led to a significant revenue loss – if anything, it would have bolstered the construction sector.

The procedural relaxations apropos return filing would enable many a taxpayer to breathe a sigh of relief, especially since filing of returns under GSTR 2 and 3 have effectively been postponed indefinitely – nonetheless, it may have a disruptive impact on the ASP/GSP-led tax compliance outsourcing business models which are predicated upon timely filing of various GST returns; ASP/GSP contracts may see some price re-negotiation owing to this relaxation.

The reduction in GST rate on restaurants is good news for the gastronomes amongst us.

A key benefit has been provided for the aviation sector by clarifying that input credit of GST on inter-state stock transfers of aircraft engines etc would be available against GST leviable on supply of air transport (of passengers) services, despite a seemingly adverse credit restriction. This was a major operational hassle being faced by various airlines and such a clarification will bring welcome relief.

The change in rates of tax from November 15, 2017 gives certainty of the date of change to businesses.  Reduction in rate of tax from 28% to 18% or 18% to 12% or 18% to 5% or 12% to 5%, however, brings its own challenges for manufacturers / distributors / retailers to change the selling prices of the concerned goods, especially those which are affixed with ‘maximum retail price’.  This reduction exposes businesses to anti-profiteering inquiries.  The reduction would reduce the working capital requirements of businesses and accordingly the costs associated with working capital.

GST Council has undertaken the role of anti-profiteering authority by changing the rate of tax for restaurants from 18% / 12% with full input tax credit to 5% without input tax credit.  ‘Since they did not pass the benefit of input tax credit to the consumers, they are not entitled to benefit of input tax credit, themselves’, said the Finance Minister.  Will some of the restaurants explore challenging this decision in the Courts, needs to be seen; though the restaurants may be content with the change as it may appear to reduce its compliance requirements.

The dates for filing returns / furnishing details have been further extended and dates have been announced for furnishing details of outward supplies for the month of August 2017 to March 2018.  The dates for furnishing details of inward supplies have not been announced, same will be worked out by Committee of Officers.  The invoicing matching principle would prevail and ought to prevail as the same is provided in the law – however, a one-time invoice matching for the period from July 2017 to March 2018 may be a larger compliance issue / aspect for businesses.  It may be apt if FORM GSTR-2A is made available to taxpayers at periodic intervals.

The changes in the composition scheme (1% rate for manufacturers and supply of service upto Rs. 5 lakh exempted) and proposed changes in the said scheme (increase in annual turnover limits for eligibility) would provide relief to small businesses.

When it rains. It pours. This adage will befit the current bag of goodies announced by the Council.  

The rate of tax debate on GST has been raging on from day one and it is fantastic that the Government and the Council quickly set things right. The rates are much more rational now. It is difficult to judge Revenue losses and such losses are also doubtful if the number of tax paying Assessees increase. While the proposed increase in threshold for composition is welcome, Government must be alert and arrest dubious methods adopted by some businesses in creating multiple Assessees at the same location, each claiming composition benefit.

In first remarks after the GST Council’s decisions in its 23rd meeting, our Hon’ble Prime Minister Narendra Modi tweeted that “jan bhagidari” was “at the core” of the government’s functioning and all its decisions were “people-inspired, people-friendly and people-centric”. Indeed, the GST Council in its 23rd meeting has made sweeping changes to the present framework of GST, allowing taxpayers and small businesses to breathe easy. Importantly, the highest GST tax slab was slashed to retain only 50 items at 28% tax bracket. Effective from November 15, 2017, as many as around 233 items from chocolates, detergents to granite and marble will become cheaper - 177 items moving from 28% to 18%, 2 items from 28% to 12% and around other 54 items also moving to lower tax brackets. As per government algorithm, these measures are expected to cost the exchequer around Rs. 20,000 crore. 

Additionally, the GST Council has come out with a string of deadline relaxations and lowering of penalty/ late fees for delayed filing of return along with an increase in the annual turnover threshold for the composition scheme to Rs 1.5 crore (overall limit to be increased to Rs. 2 Cr) from the recently revised Rs 1 crore. Taxpayers would file summary return in Form GSTR-3B  along with payment of tax by 20th of the succeeding month till March, 2018. Further filing of GSTR 2 & 3 is done away with till March, 2018 and requires filing of details in FORM GSTR-1 only till March 2018, with taxpayers divided into two categories - Taxpayers with annual aggregate turnover upto Rs. 1.5 crore filing quarterly GSTR-1 and those with annual aggregate turnover more than Rs. 1.5 crore filing GSTR-1 on monthly basis, as per revised frequency provided. Eating out will also be easier as all standalone restaurants are now going to be taxed at 5% without ITC, as against attracting different rates based on whether or not they were air-conditioned.

Despite these wholesale changes in GST rates and other procedures, we are still in the state of flux as to when the apparent flaws in the basic structure of GSTN portal will be sorted out. It is being stated that a committee under GSTN chairman Ajay Bhushan Pandey has been set up to look into the matter of making filing of GSTR-2 and GSTR-3 business friendly, but complete removal of all forms of technical glitches is still-to-watch scenario. Even after so much of rates re-shuffling, goods like washing machine, AC, etc., which are actually the need of aam aadmi, is still categorised as luxury item falling in 28% tax bracket. Further, marbles and certain sanitary fittings will now be taxed at lower rate than cement, which creates an awkward position as cement is the first basic material for construction. May be we will see some more reductions in future to align these gaps.